Sunday, September 23, 2007

'The GSE Shuffle"

Lockie Antoinette: “No bread? Let them eat… mbs”

Dr. Lockhart Kildare: “Here, take two of these ‘percent thingies’ and call me in February.”

Professor Paulson: “Yes they can help, but first they must bend over and..…!”

Field Marshall Bernanke: “Whatever you do, just make it short and quick. Don’t hurt me.”

“Dodge, feint, and back around. Parry, thrust, and don’t make a sound. Kneel, bend, and stalk real slow. Bob, weave, and pretend you don’t know. Rise up, give in, and show no hate. Spin, talk, prevaricate….now you're doing the GSE shuffle.”

The GSE Shuffle,” lyrics by B. Maloni, music by you.


If you were a bit confused reading or hearing the Bush Administration’s frantic GSE policy maneuvering last week, shortly after HUD announced both companies had met their most recent affordable housing goals, you are not alone.

Nonetheless, just call the results a win for the GSE good guys.

After fending off so many congressional demands to “unleash Fannie and Freddie,” bringing additional liquidity to today’s mortgage market problems-- and before he gave in a scosh--OFHEO’s Jim Lockhart just ran out of excuses for not doing what Senators and Congressmen were demanding.

The pressure on his was so great that Lockie, reportedly, was answering every phone call, saying, “I am sorry Mr. Chairman, but we can’t……,” even, the day the call wasn't from Capitol Hill.

“I am sorry, Mr. Chairman...oh, hello dear. Of course I am not caving. I’m am just using reverse psychology. Yes dear, I won’t dear. Yes dear, me too, dear. I promise. Um, goodbye Mr. President! Hey, hey, don’t forget that good WalMart job for me. KnowwhatImean?”

OK. It's just a joke!

That particular conversation never happened and my cynical treatment is designed just to exploit humor. Of course. Lockie doesn’t call the President “Dear” (at least not that I know of) and I have no personal idea about “Two Gun’s” vocational aspirations with WalMart.

But it was heartwarming watching Lockhart, Paulson, and, yes, Bernanke dance as they realized that neither the market nor political momentum supported their hardline, “We will not employ the GSEs, ever” campaign.

It also is hard not to be derisive and snicker at their new positioning, especially when you consider the long record of Admin and Fed misstatements, tall tales, and abuse aimed at Fannie and Freddie.

Thumbs Up, Chris, Chuck and Barney

Senators Chris Dodd (D-Ct.) , Senator Chuck Schumer (D-NY) and Rep. Barney Frank (D-Mass.) deserve the greatest credit for causing the WH turnabout. Kudos also go to the companies, their industry supporters and others both, in and out of Congress. Nobody backed off their legitimate conviction that Fannie and Freddie can be part of a market solution to today's subprime and jumbo problems.

That spirited advocacy forced the Bush White House to realize that Fannie Mae and Freddie Mac were created to provide mortgage market and borrower relief in just these types of unsettled markets.

It’s too early to light any victory cigars, since this debate isn't over, but the anti-GSE elements have made enough concessions and retreated enough, so that a possible resolution appears doable.

Fannie and Freddie only can help “in February,” Lockie claims, when each will be SEC current. Secretary Paulson says they can be very helpful breaking up jumbo mortgage market illiquidity logjam, but only after Congress passes new GSE regulatory legislation.

Given those flimsy caveats, its occurred to many people that Fannie and Freddie can likely help now, when there is a significant and pressing mortgage market problem.

After all, the companies both are capital sufficient, according to OFHEO. They have met their latest affordable housing goals, according to HUD, and they are doing business everyday, albeit handcuffed by OFHEO’s vague and totally discretionary operational limitations.

Shouldn’t someone employ the GSEs sooner than February, meaning today, when the big bad wolf is banging on the mortgage market’s door?

Paulson and Bernanke (the latter employing fedspeak) both endorsed the GSEs—on a short term basis (what a great idea, where did I hear it before?)—funding higher balance jumbo loans, those currently larger than the GSE limits, so the two companies can clean up the illiquidity mess created by the traditional, but now MIA non-conforming investors.

Pay the Piper

But Paulson has a price. Before the GSEs can provide the relief that the Admin obviously believes they can, the Treasury Secretary would have Congress first pass a new regulatory restructuring bill, probably with some Administration language returned—which was overwhelmingly knocked out by a bipartisan vote, when the House passed its bill--that would give a new GSE regulator unchallenged authority to intervene in Fannie/Freddie businesses operations, based on any event in the economy.

So, Treasury is saying that we have a “right now” problem in the jumbo mortgage market segment, to which Paulson would apply a “sometime next year” GSE solution?

(A recent report suggested that the traditional 25 basis point spread between conforming and non-conforming product grew to 92 basis points last week. That’s a pretty expensive fear premium that some investors are charging to buy jumbos. Needless to say, Fannie’s and Freddie’s entry into jumbo financing--even briefly--would all but erase that dissimilarity, bringing greater liquidity and efficiency to the, now, “non-conforming” market.)

It wouldn’t matter, in this Admin/Paulson/Lockie model, whether the issues justifying intervention were related to GSE business actions or not. Lockie’s successor could use financial or economic irrelevancies—if he/she wanted—to impose sanctions on Fannie and Freddie.

“Hello? Yes, Lockie’s successor here. Nah, Lockie ain’t here, no more. He's greetin' at WalMart. You say Angelo’s going to do what, when, in how many branches? Plus, you claim his handicap is down a stroke and his tan is fading? Boy, that doesn’t sound good for Fannie and Freddie; I better increase their capital requirements. KnowwhatImean?”

The Fed's terms are far less onerous. Mr. Bernanke just wants whatever GSE supplied mortgage market relief that Congress chooses to be short term

For now, GSE supporters can enjoy the Administration’s continued conflicting and self-defeating shuffling. Congress, based on statements of Messrs. Dodd, Schumer, and Frank, wisely seems determined to get rid of the GSE investment caps, come up with some realistic new mortgage limits, as well as possibly letting the GSEs work—for a brief period—in the “jumbo market.” Congress also seems to support some Administration-backed subprime policy changes for FHA.

An Understanding and a Reminder

I don’t know if it will take one bill or two to accomplish all that each side wants, especially if the Senate Banking Committee and the House Financial Services Committee lack time to consider two separate pieces of legislation. But, the situation screams for compromise and a “quid pro quo.” I think Congress can get most of the GSE policy changes it wants, plus it should insist on some version of the bipartisan Bean (D)-Negeubauer (R) House language, since this Administration has given obvious and ample proof why some restraints on a wayward regulator are desirable.

When a positive GSE proposal is pending, but someone in this Administration conditions it on the companies being “totally SEC compliant,” I am reminded that there still are many in this town, including a group on the Hill, who believe that the GSEs never were horribly non-compliant with FAS 133, the incident this Administration used to label them outside the rules. The “justifiable doubters,” believe that Fannie politically got into the face of senior Bush Administration officials--one too many times--and the faux SEC case was used to whack the GSEs with a major mallet.

It would be easier to ignore that possibility, if the Bush White House hadn't shown itself too willing and very able to place itself above the law and employ their Cabinet and regulatory agency political appointees to penalize presumed enemies.


(Recommended reading: “The Great Inflation Mystery, Still Unsolved,” in Sunday’s New York Times business section, penned by Ben Stein, who played the great droll voiced roll-taking high school teacher in “Ferris Buhler’s Day Off.” Stein has a wonderful economic perspective. He writes about the subject plainly and masterfully.)

Maloni 9-24-2007

1 comment:

Bill Maloni said...

The initial blog had a typo or two, which i just corrected (misspelled "Negeubauer," etc) so I just have edited those.

The post however remains contectually the same,although one long time colleague and valued reader suggests that I was a little too "sexual" in my lead. That wasn't my intent, but I can see where that might occur to some.

My apologies to anyone offended by the "rough langauge."